Staples (NASDAQ:SPLS) outperformed the market on Thursday, gaining 3.4% compared to a half-percent rally in the broader market. There was no real news driving this surge higher, other than general momentum that has lifted the stock up 14% in the last six weeks.
Options players took notice of this move and jumped aboard the bullish train, buying up out-of-the-money calls in the January 2013 series. The January 17.50-strike call saw nearly 28,700 contracts change hands during the day, versus open interest of just 3,072.
All in all, roughly 55,000 call options traded during the day along with 4,000 puts. This total volume of 59,000 easily exceeds average option volume of fewer than 4,000 options.
It looks as though the majority of the January 17.50 calls were purchased for an average price of about $1 per contract. These long-terms calls are a bet that SPLS will be trading above the 17.50 level by the time January options expire in 10 months or so. Breakeven for the calls is the strike price plus the premium paid (an average of $18.50). SPLS shares have not traded north of the $18 level since last May.
If the bullish diagnosis is correct and SPLS does rally over the next several months, gains are theoretically unlimited for the call buyers. The current delta of this call is 42, meaning the calls will increase by 42 cents for every $1 advance in the underlying stock. Delta does change along with other factors such as stock price and time until expiration. The maximum potential loss for these calls, meanwhile, is just 100% of the call premium paid.
SPLS also saw some long-term call selling on the tape earlier this month, as neutral-to-bearish speculators made a bet that SPLS will be trading below the 15 strike when next January rolls around. On March 5, more than 30,000 January 15 calls traded, the majority of which were sold to open. This was likely part of a covered-call strategy and paired with an existing stock position. If not, however, gains are limited to the credit collected for selling the call while losses are unlimited if the shares move higher.
It’s interesting that not only have both these names seen call activity, but relatively long-term call buying, to boot. Are option traders hoping that an improving retail-sales backdrop will trickle down to specialty names such as SPLS? Or are the long-term options just a more conservative way to play expectations for short-term gains? Either way, it is a trend worth monitoring as both stocks attempt to fight their way higher and pare longer-term losses. ODP is down 33% in the past 12 months; SPLS has lost 17% since last March.
As of this writing, Beth Gaston Moon did not hold a position in any of the aforementioned securities.